Can Twitter data predict the future?

PaulHawtin CEO Derwent Capital

Investors and traders around the world have accepted that the financial markets are driven by greed and fear, certainly in the short term. These two mood states are primitive human instincts which, until now, we've struggled to accurately quantify.

Social networks, such as Twitter and Facebook, burst on to the scene five years ago and have since grown into Internet giants. Facebook
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has over 900 million active members and Twitter over 250 million, with users posting over 2 billion "tweets" or messages every week. This provides a hugely valuable and rich source of real-time data that can be mined by super fast computers.

Imagine if you could quietly listen in to billions of messages, news articles and comments searching for keywords and in turn derive sentiment? Wouldn't it be interesting to see how the investment community was "feeling" about Facebook stock this very second? Well, this is now a reality and more and more companies, along with the academic community, are exploring this area.

In October 2010 Professor Johan Bollen from the School of Informatics and Computing at Indiana University published a paper titled "Twitter mood predicts the stock market". The paper detailed a study in which sentiment derived from Twitter data was compared with daily movements on the Dow Jones Industrial Average
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The results were outstanding.

Not only was there a very high correlation but the mood swings on Twitter preceded the movements of the Dow. So much so that Bollen was able to predict the daily direction of the index with an 87.6% accuracy.

It doesn't take a rocket scientist to realize just how valuable this information could be to a potential trader or investor. At Derwent Capital we're pioneers in trading the financial markets using global sentiment derived from large-scale social media analysis.

Over the coming months I'm going to give regular updates and commentary on stocks, currencies and commodities that are experiencing large sentiment swings. I'm also going to produce info-graphics showing historic sentiment and pricing to highlight the correlations along with specific events that have caused significant sentiment swings.

On Friday 18th May, the day Facebook stock listed for the first time, Datasift monitored the stock price along with public sentiment on Twitter and produced a very interesting info-graphic. Once again there was a very close correlation between the two.

As with any investment idea or concept there's no guarantees. I'm not saying this is the "Holy Grail" of investment or trading strategies but it is certainly a very interesting research tool that I expect to become more influential within the investment industry over the coming years.

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